Initial public offering (IPO) or stock market launch is a type of public offering in which

shares of a company usually are sold to institutional investors[1] that in turn, sell to the general
public, on a securities exchange, for the first time. Through this process, a privately held
company transforms into a public company. Initial public offerings are mostly used by
companies to raise the expansion of capital, possibly to monetize the investments of early private
investors, and to become publicly traded enterprises. A company selling shares is never required
to repay the capital to its public investors. After the IPO, when shares trade freely in the open
market, money passes between public investors. Although IPO offers many advantages, there are
also significant disadvantages, chief among these are the costs associated with the process and
the requirement to disclose certain information that could prove helpful to competitors. The IPO
process is colloquially known as going public.
Details of the proposed offering are disclosed to potential purchasers in the form of a lengthy
document known as a prospectus. Most companies undertake an IPO with the assistance of
an investment banking firm acting in the capacity of an underwriter. Underwriters provide
several services, including help with correctly assessing the value of shares (share price) and
establishing a public market for shares (initial sale). Alternative methods such as the dutch
auction have also been explored. In terms of size and public participation, the two most notable
examples of this method is the Google IPO[2] and Snapchat's parent company Snap Inc.[3]China
has recently emerged as a major IPO market, with several of the largest IPOs taking place in that
country.

History[edit]
The earliest form of a company which issued public shares was the case of the publicani during
the Roman Republic. Like modern joint-stock companies, the publicani were legal bodies
independent of their members whose ownership was divided into shares, or parties. There is
evidence that these shares were sold to public investors and traded in a type of over-the-
counter market in the Forum, near the Temple of Castor and Pollux. The shares fluctuated in value,
encouraging the activity of speculators, or quaestors. Mere evidence remains of the prices for
which partes were sold, the nature of initial public offerings, or a description of stock market
behavior. Publicanis lost favor with the fall of the Republic and the rise of the Empire.[5]
In the early modern period, the Dutch were financial innovators who helped lay the foundations of
modern financial system.[6][7] The first modern IPO occurred in March 1602 when the Dutch East India
Company offered shares of the company to the public in order to raise capital. The Dutch East India
Company (VOC) became the first company in history to issue bonds and shares of stock to the
general public. In other words, the VOC was officially the first publicly traded company, because it
was the first company to be ever actually listed on an official stock exchange. While the Italian city-
states produced the first transferable government bonds, they did not develop the other ingredient
necessary to produce a fully fledged capital market: corporate shareholders. As Edward
Stringham (2015) notes, "companies with transferable shares date back to classical Rome, but these
were usually not enduring endeavors and no considerable secondary market existed (Neal, 1997, p.
61)."[8]
In the United States, the first IPO was the public offering of Bank of North America around 1783
Advantages and disadvantages
Advantages
When a company lists its securities on a public exchange the money paid by the investing public for
then newly issued shares goes directly to the company (primary offering) as well as to any early
private investors who opt to sell all or a portion of their holdings (secondary offering) as part of the
larger IPO. An IPO, therefore, allows a company to tap into a wide pool of potential investors to
provide itself with capital for future growth, repayment of debt, or working capital. A company selling
common shares is never required to repay the capital to its public investors. Those investors must
endure the unpredictable nature of the open market to price and trade their shares. After the IPO,
when shares trade freely in the open market, money passes between public investors. For early
private investors who choose to sell shares as part of the IPO process, the IPO represents an
opportunity to monetize their investment. After the IPO, once shares trade in the open market,
investors holding large blocks of shares can either sell those shares piecemeal in the open market,
or sell a large block of shares directly to the public, at a fixed price, through a secondary market
offering. This type of offering is not dilutive, since no new shares are being created.
Once a company is listed, it is able to issue additional common shares in a number of different ways,
one of which is the follow-on offering. This method provides capital for various corporate purposes
through the issuance of equity (see stock dilution) without incurring any debt. This ability to quickly
raise potentially large amounts of capital from the marketplace is a key reason many companies
seek to go public.
An IPO accords several benefits to the previously private company:

Enlarging and diversifying equity base

Enabling cheaper access to capital
Increasing exposure, prestige, and public image
Attracting and retaining better management and employees through liquid equity participation
Facilitating acquisitions (potentially in return for shares of stock)
Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.
Disadvantages
There are several disadvantages to completing an initial public offering:

Significant legal, accounting and marketing costs, many of which are ongoing
Requirement to disclose financial and business information
Meaningful time, effort and attention required of management
Risk that required funding will not be raised
Public dissemination of information which may be useful to competitors, suppliers and
customers.
Loss of control and stronger agency problems due to new shareholders
Increased risk of litigation, including private securities class actions and shareholder derivative
actions
The launch by eDreams (Europe's largest independent online travel agency) illustrates some of the
risks involved in an IPO.
Independent Board Member James Hare (James Otis Hare II) oversaw the company's public launch
on 4 April 2014.
eDreams offered its stock at 10.25 Euros per share.
That stock price had fallen to 1.02 Euros by 24 October 2014, wiping out around one billion Euros of
market capitalization.
Some commentators called the launch Europes worst performing IPO of 2014
EDreams moved quickly, asking their shareholders for authorization to Discharge to Mr. James Otis
Hare for the exercise of his mandate as director of the Company until his resignation as of 25 March,
2015.
EDreams issued the following announcement: Effective March 25, 2015, eDreams ODIGEO (the
Company) accepts the resignation of Mr. James Hare as an Independent member from the Board of
Directors
In June 2015, CEO Dana Dunne introduced a new strategy focusing on mobile, revenue
diversification and customer experience improvements, which led to a strong turnaround in business
performance.
Dunne's new strategy caused that stock price to rise above 3 euros by January 2017.
But it had been a tough lesson for the company, and a warning of the dangers inherent in any IPO.

Procedure
IPO procedures are governed by different laws in different countries. In the United States, IPOs are
regulated by the United States Securities and Exchange Commission under the Securities Act of
1933 In the United Kingdom, the UK Listing Authority reviews and approves prospectuses and
operates the listing regime.

Advance planning
Planning is crucial to a successful IPO. One book suggests the following 7 advance planning steps:

1. develop an impressive management and professional team

2. grow the company's business with an eye to the public marketplace
3. obtain audited financial statements using IPO-accepted accounting principles
4. clean up the company's act
5. establish antitakeover defences
6. develop good corporate governance
7. create insider bail-out opportunities and take advantage of IPO windows.
Retention of underwriters
IPOs generally involve one or more investment banks known as "underwriters". The company
offering its shares, called the "issuer", enters into a contract with a lead underwriter to sell its shares
to the public. The underwriter then approaches investors with offers to sell those shares.
A large IPO is usually underwritten by a "syndicate" of investment banks, the largest of which take
the position of "lead underwriter". Upon selling the shares, the underwriters retain a portion of the
proceeds as their fee. This fee is called an underwriting spread. The spread is calculated as a
discount from the price of the shares sold (called the gross spread). Components of an underwriting
spread in an initial public offering (IPO) typically include the following (on a per share basis):
Manager's fee, Underwriting feeearned by members of the syndicate, and the Concession
earned by the broker-dealer selling the shares. The Manager would be entitled to the entire
underwriting spread. A member of the syndicate is entitled to the underwriting fee and the
concession. A broker dealer who is not a member of the syndicate but sells shares would receive
only the concession, while the member of the syndicate who provided the shares to that broker
dealer would retain the underwriting fee.[22] Usually, the managing/lead underwriter, also known as
the book runner, typically the underwriter selling the largest proportions of the IPO, takes the highest
portion of the gross spread, up to 8% in some cases.
Multinational IPOs may have many syndicates to deal with differing legal requirements in both the
issuer's domestic market and other regions. For example, an issuer based in the E.U. may be
represented by the main selling syndicate in its domestic market, Europe, in addition to separate
syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main
selling group is also the lead bank in the other selling groups.
Because of the wide array of legal requirements and because it is an expensive process, IPOs also
typically involve one or more law firms with major practices in securities law such as the Magic
Circle firms of London and the white shoe firms of New York City.
Financial historians Richard Sylla and Robert E. Wright have shown that before 1860 most early
U.S. corporations sold shares in themselves directly to the public without the aid of intermediaries
like investment banks.The direct public offering or DPO, as they term it, was not done by auction but
rather at a share price set by the issuing corporation. In this sense, it is the same as the fixed price
public offers that were the traditional IPO method in most non-US countries in the early 1990s. The
DPO eliminated the agency problem associated with offerings intermediated by investment banks.
There has recently been a movement based on crowd funding to revive the popularity of Direct
Public Offerings.

Allocation and pricing

The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods
include:

Best efforts contract

Firm commitment contract
All-or-none contract
Bought deal
Public offerings are sold to both institutional investors and retail clients of the underwriters. A
licensed securities salesperson (Registered Representative in the USA and Canada) selling shares
of a public offering to his clients is paid a portion of the selling concession (the fee paid by the issuer
to the underwriter) rather than by his client. In some situations, when the IPO is not a "hot" issue
(undersubscribed), and where the salesperson is the client's advisor, it is possible that the financial
incentives of the advisor and client may not be aligned.
The issuer usually allows the underwriters an option to increase the size of the offering by up to 15%
under certain circumstance known as the greenshoe or overallotment option. This option is always
exercised when the offering is considered a "hot" issue, by virtue of being oversubscribed.
In the USA, clients are given a preliminary prospectus, known as a red herring prospectus, during
the initial quiet period. The red herring prospectus is so named because of a bold red warning
statement printed on its front cover. The warning states that the offering information is incomplete,
and may be changed. The actual wording can vary, although most roughly follow the format
exhibited on the Facebook IPO red herring. During the quiet period, the shares cannot be offered for
sale. Brokers can, however, take indications of interest from their clients. At the time of the stock
launch, after the Registration Statement has become effective, indications of interest can be
converted to buy orders, at the discretion of the buyer. Sales can only be made through a final
prospectus cleared by the Securities and Exchange Commission.
The Final step in preparing and filing the final IPO prospectus is for the issuer to retain one of the
major financial "printers", who print (and today, also electronically file with the SEC) the registration
statement on Form S-1. Typically, preparation of the final prospectus is actually performed at the
printer, where in one of their multiple conference rooms the issuer, issuer's counsel (attorneys),
underwriter's counsel (attorneys), the lead underwriter(s), and the issuer's accountants/auditors
make final edits and proofreading, concluding with the filing of the final prospectus by the financial
printer with the Securities and Exchange Commission.[27]
Before legal actions initiated by New York Attorney General Eliot Spitzer, which later became known
as the Global Settlement enforcement agreement, some large investment firms had initiated
favorable research coverage of companies in an effort to aid corporate finance departments and
retail divisions engaged in the marketing of new issues. The central issue in that enforcement
agreement had been judged in court previously. It involved the conflict of interest between
the investment banking and analysis departments of ten of the largest investment firms in the United
States. The investment firms involved in the settlement had all engaged in actions and practices that
had allowed the inappropriate influence of their research analysts by their investment bankers
seeking lucrative fees.A typical violation addressed by the settlement was the case
of CSFB and Salomon Smith Barney, which were alleged to have engaged in inappropriate spinning
of "hot" IPOs and issued fraudulent research reports in violation of various sections within
the Securities Exchange Act of 1934

Pricing
A company planning an IPO typically appoints a lead manager, known as a book runner, to help it
arrive at an appropriate price at which the shares should be issued. There are two primary ways in
which the price of an IPO can be determined. Either the company, with the help of its lead
managers, fixes a price ("fixed price method"), or the price can be determined through analysis of
confidential investor demand data compiled by the book runner ("book building).
Historically, many IPOs have been underpriced. The effect of underpricing an IPO is to generate
additional interest in the stock when it first becomes publicly traded. Flipping, or quickly selling
shares for a profit, can lead to significant gains for investors who were allocated shares of the IPO at
the offering price. However, underpricing an IPO results in lost potential capital for the issuer. One
extreme example is theglobe.com IPO which helped fuel the IPO "mania" of the late 1990s internet
era. Underwritten by Bear Stearns on 13 November 1998, the IPO was priced at $9 per share. The
share price quickly increased 1000% on the opening day of trading, to a high of $97. Selling
pressure from institutional flipping eventually drove the stock back down, and it closed the day at
$63. Although the company did raise about $30 million from the offering, it is estimated that with the
level of demand for the offering and the volume of trading that took place they might have left
upwards of $200 million on the table.
The danger of overpricing is also an important consideration. If a stock is offered to the public at a
higher price than the market will pay, the underwriters may have trouble meeting their commitments
to sell shares. Even if they sell all of the issued shares, the stock may fall in value on the first day of
trading. If so, the stock may lose its marketability and hence even more of its value. This could result
in losses for investors, many of whom being the most favored clients of the underwriters. Perhaps
the best known example of this is the Facebook IPO in 2012.
Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to
reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise
an adequate amount of capital for the company. When pricing an IPO, underwriters use a variety of
key performance indicators and non-GAAP measures. The process of determining an optimal price
usually involves the underwriters ("syndicate") arranging share purchase commitments from leading
institutional investors.
Some researchers (Friesen & Swift, 2009) believe that the underpricing of IPOs is less a deliberate
act on the part of issuers and/or underwriters, and more the result of an over-reaction on the part of
investors (Friesen & Swift, 2009). One potential method for determining underpricing is through the
use of IPO underpricing algorithms
Advantages and disadvantages
Advantages
When a company lists its securities on a public exchange, the money paid by the investing public for
then newly issued shares goes directly to the company (primary offering) as well as to any early
private investors who opt to sell all or a portion of their holdings (secondary offering) as part of the
larger IPO. An IPO, therefore, allows a company to tap into a wide pool of potential investors to
provide itself with capital for future growth, repayment of debt, or working capital. A company selling
common shares is never required to repay the capital to its public investors. Those investors must
endure the unpredictable nature of the open market to price and trade their shares. After the IPO,
when shares trade freely in the open market, money passes between public investors. For early
private investors who choose to sell shares as part of the IPO process, the IPO represents an
opportunity to monetize their investment. After the IPO, once shares trade in the open market,
investors holding large blocks of shares can either sell those shares piecemeal in the open market,
or sell a large block of shares directly to the public, at a fixed price, through a secondary market
offering. This type of offering is not dilutive, since no new shares are being created.
Once a company is listed, it is able to issue additional common shares in a number of different ways,
one of which is the follow-on offering. This method provides capital for various corporate purposes
through the issuance of equity (see stock dilution) without incurring any debt. This ability to quickly
raise potentially large amounts of capital from the marketplace is a key reason many companies
seek to go public.
An IPO accords several benefits to the previously private company:

Enlarging and diversifying equity base

Enabling cheaper access to capital
Increasing exposure, prestige, and public image
Attracting and retaining better management and employees through liquid equity participation
Facilitating acquisitions (potentially in return for shares of stock)
Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.
Disadvantages
There are several disadvantages to completing an initial public offering:

Significant legal, accounting and marketing costs, many of which are ongoing
Requirement to disclose financial and business information
Meaningful time, effort and attention required of management
Risk that required funding will not be raised
Public dissemination of information which may be useful to competitors, suppliers and
customers.
Loss of control and stronger agency problems due to new shareholders
Increased risk of litigation, including private securities class actions and shareholder derivative
actions
The launch by eDreams (Europe's largest independent online travel agency) illustrates some of the
risks involved in an IPO.
Independent Board Member James Hare (James Otis Hare II) oversaw the company's public launch
on 4 April 2014.
eDreams offered its stock at 10.25 Euros per share.
That stock price had fallen to 1.02 Euros by 24 October 2014, wiping out around one billion Euros of
market capitalization.
Some commentators called the launch Europes worst performing IPO of 2014.
eDreams moved quickly, asking their shareholders for authorization to Discharge to Mr. James Otis
Hare for the exercise of his mandate as director of the Company until his resignation as of 25 March,
2015.
eDreams issued the following announcement: Effective March 25, 2015, eDreams ODIGEO (the
Company) accepts the resignation of Mr. James Hare as an Independent member from the Board of
Directors.
In June 2015, CEO Dana Dunne introduced a new strategy focusing on mobile, revenue
diversification and customer experience improvements, which led to a strong turnaround in business
performance.
Dunne's new strategy caused that stock price to rise above 3 euros by January 2017.
But it had been a tough lesson for the company, and a warning of the dangers inherent in any IPO.

Procedure
IPO procedures are governed by different laws in different countries. In the United States, IPOs are
regulated by the United States Securities and Exchange Commission under the Securities Act of
1933. In the United Kingdom, the UK Listing Authority reviews and approves prospectuses and
operates the listing regime.

Advance planning
Planning is crucial to a successful IPO. One book[21] suggests the following 7 advance planning
steps:

1. develop an impressive management and professional team

2. grow the company's business with an eye to the public marketplace
3. obtain audited financial statements using IPO-accepted accounting principles
4. clean up the company's act
5. establish antitakeover defences
6. develop good corporate governance
7. create insider bail-out opportunities and take advantage of IPO windows.
Retention of underwriters
IPOs generally involve one or more investment banks known as "underwriters". The company
offering its shares, called the "issuer", enters into a contract with a lead underwriter to sell its shares
to the public. The underwriter then approaches investors with offers to sell those shares.
A large IPO is usually underwritten by a "syndicate" of investment banks, the largest of which take
the position of "lead underwriter". Upon selling the shares, the underwriters retain a portion of the
proceeds as their fee. This fee is called an underwriting spread. The spread is calculated as a
discount from the price of the shares sold (called the gross spread). Components of an underwriting
spread in an initial public offering (IPO) typically include the following (on a per share basis):
Manager's fee, Underwriting feeearned by members of the syndicate, and the Concession
earned by the broker-dealer selling the shares. The Manager would be entitled to the entire
underwriting spread. A member of the syndicate is entitled to the underwriting fee and the
concession. A broker dealer who is not a member of the syndicate but sells shares would receive
only the concession, while the member of the syndicate who provided the shares to that broker
dealer would retain the underwriting fee. Usually, the managing/lead underwriter, also known as
the book runner, typically the underwriter selling the largest proportions of the IPO, takes the highest
portion of the gross spread, up to 8% in some cases.
Multinational IPOs may have many syndicates to deal with differing legal requirements in both the
issuer's domestic market and other regions. For example, an issuer based in the E.U. may be
represented by the main selling syndicate in its domestic market, Europe, in addition to separate
syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main
selling group is also the lead bank in the other selling groups.
Because of the wide array of legal requirements and because it is an expensive process, IPOs also
typically involve one or more law firms with major practices in securities law, such as the Magic
Circle firms of London and the white shoe firms of New York City.
Financial historians Richard Sylla and Robert E. Wright have shown that before 1860 most early
U.S. corporations sold shares in themselves directly to the public without the aid of intermediaries
like investment banks.] The direct public offering or DPO, as they term it,[24] was not done by auction
but rather at a share price set by the issuing corporation. In this sense, it is the same as the fixed
price public offers that were the traditional IPO method in most non-US countries in the early 1990s.
The DPO eliminated the agency problem associated with offerings intermediated by investment
banks. There has recently been a movement based on crowd funding to revive the popularity of
Direct Public Offerings.

Allocation and pricing

The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods
include:

Best efforts contract

Firm commitment contract
All-or-none contract
Bought deal
Public offerings are sold to both institutional investors and retail clients of the underwriters. A
licensed securities salesperson (Registered Representative in the USA and Canada) selling shares
of a public offering to his clients is paid a portion of the selling concession (the fee paid by the issuer
to the underwriter) rather than by his client. In some situations, when the IPO is not a "hot" issue
(undersubscribed), and where the salesperson is the client's advisor, it is possible that the financial
incentives of the advisor and client may not be aligned.
The issuer usually allows the underwriters an option to increase the size of the offering by up to 15%
under certain circumstance known as the greenshoe or overallotment option. This option is always
exercised when the offering is considered a "hot" issue, by virtue of being oversubscribed.
In the USA, clients are given a preliminary prospectus, known as a red herring prospectus, during
the initial quiet period. The red herring prospectus is so named because of a bold red warning
statement printed on its front cover. The warning states that the offering information is incomplete,
and may be changed. The actual wording can vary, although most roughly follow the format
exhibited on the Facebook IPO red herring. During the quiet period, the shares cannot be offered for
sale. Brokers can, however, take indications of interest from their clients. At the time of the stock
launch, after the Registration Statement has become effective, indications of interest can be
converted to buy orders, at the discretion of the buyer. Sales can only be made through a final
prospectus cleared by the Securities and Exchange Commission.
The Final step in preparing and filing the final IPO prospectus is for the issuer to retain one of the
major financial "printers", who print (and today, also electronically file with the SEC) the registration
statement on Form S-1. Typically, preparation of the final prospectus is actually performed at the
printer, where in one of their multiple conference rooms the issuer, issuer's counsel (attorneys),
underwriter's counsel (attorneys), the lead underwriter(s), and the issuer's accountants/auditors
make final edits and proofreading, concluding with the filing of the final prospectus by the financial
printer with the Securities and Exchange Commission.[27]
Before legal actions initiated by New York Attorney General Eliot Spitzer, which later became known
as the Global Settlement enforcement agreement, some large investment firms had initiated
favorable research coverage of companies in an effort to aid corporate finance departments and
retail divisions engaged in the marketing of new issues. The central issue in that enforcement
agreement had been judged in court previously. It involved the conflict of interest between
the investment banking and analysis departments of ten of the largest investment firms in the United
States. The investment firms involved in the settlement had all engaged in actions and practices that
had allowed the inappropriate influence of their research analysts by their investment bankers
seeking lucrative fees. A typical violation addressed by the settlement was the case
of CSFB and Salomon Smith Barney, which were alleged to have engaged in inappropriate spinning
of "hot" IPOs and issued fraudulent research reports in violation of various sections within
the Securities Exchange Act of 1934.

Pricing
A company planning an IPO typically appoints a lead manager, known as a book runner, to help it
arrive at an appropriate price at which the shares should be issued. There are two primary ways in
which the price of an IPO can be determined. Either the company, with the help of its lead
managers, fixes a price ("fixed price method"), or the price can be determined through analysis of
confidential investor demand data compiled by the book runner ("book building").
Historically, many IPOs have been underpriced. The effect of underpricing an IPO is to generate
additional interest in the stock when it first becomes publicly traded. Flipping, or quickly selling
shares for a profit, can lead to significant gains for investors who were allocated shares of the IPO at
the offering price. However, underpricing an IPO results in lost potential capital for the issuer. One
extreme example is theglobe.com IPO which helped fuel the IPO "mania" of the late 1990s internet
era. Underwritten by Bear Stearns on 13 November 1998, the IPO was priced at $9 per share. The
share price quickly increased 1000% on the opening day of trading, to a high of $97. Selling
pressure from institutional flipping eventually drove the stock back down, and it closed the day at
$63. Although the company did raise about $30 million from the offering, it is estimated that with the
level of demand for the offering and the volume of trading that took place they might have left
upwards of $200 million on the table.
The danger of overpricing is also an important consideration. If a stock is offered to the public at a
higher price than the market will pay, the underwriters may have trouble meeting their commitments
to sell shares. Even if they sell all of the issued shares, the stock may fall in value on the first day of
trading. If so, the stock may lose its marketability and hence even more of its value. This could result
in losses for investors, many of whom being the most favored clients of the underwriters. Perhaps
the best known example of this is the Facebook IPO in 2012.
Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to
reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise
an adequate amount of capital for the company. When pricing an IPO, underwriters use a variety of
key performance indicators and non-GAAP measures. The process of determining an optimal price
usually involves the underwriters ("syndicate") arranging share purchase commitments from leading
institutional investors.
Some researchers (Friesen & Swift, 2009) believe that the underpricing of IPOs is less a deliberate
act on the part of issuers and/or underwriters, and more the result of an over-reaction on the part of
investors (Friesen & Swift, 2009). One potential method for determining underpricing is through the
use of IPO underpricing algorithms.
Advantages and disadvantages
Advantages
When a company lists its securities on a public exchange, the money paid by the investing public for
then newly issued shares goes directly to the company (primary offering) as well as to any early
private investors who opt to sell all or a portion of their holdings (secondary offering) as part of the
larger IPO. An IPO, therefore, allows a company to tap into a wide pool of potential investors to
provide itself with capital for future growth, repayment of debt, or working capital. A company selling
common shares is never required to repay the capital to its public investors. Those investors must
endure the unpredictable nature of the open market to price and trade their shares. After the IPO,
when shares trade freely in the open market, money passes between public investors. For early
private investors who choose to sell shares as part of the IPO process, the IPO represents an
opportunity to monetize their investment. After the IPO, once shares trade in the open market,
investors holding large blocks of shares can either sell those shares piecemeal in the open market,
or sell a large block of shares directly to the public, at a fixed price, through a secondary market
offering. This type of offering is not dilutive, since no new shares are being created.
Once a company is listed, it is able to issue additional common shares in a number of different ways,
one of which is the follow-on offering. This method provides capital for various corporate purposes
through the issuance of equity (see stock dilution) without incurring any debt. This ability to quickly
raise potentially large amounts of capital from the marketplace is a key reason many companies
seek to go public.
An IPO accords several benefits to the previously private company:

Enlarging and diversifying equity base

Enabling cheaper access to capital
Increasing exposure, prestige, and public image
Attracting and retaining better management and employees through liquid equity participation
Facilitating acquisitions (potentially in return for shares of stock)
Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.
Disadvantages
There are several disadvantages to completing an initial public offering:

Significant legal, accounting and marketing costs, many of which are ongoing
Requirement to disclose financial and business information
Meaningful time, effort and attention required of management
Risk that required funding will not be raised
Public dissemination of information which may be useful to competitors, suppliers and
customers.
Loss of control and stronger agency problems due to new shareholders
Increased risk of litigation, including private securities class actions and shareholder derivative
actions
The launch by eDreams (Europe's largest independent online travel agency) illustrates some of the
risks involved in an IPO.
Independent Board Member James Hare (James Otis Hare II) oversaw the company's public launch
on 4 April 2014.
EDreams offered its stock at 10.25 Euros per share.[12]
That stock price had fallen to 1.02 Euros by 24 October 2014, wiping out around one billion Euros of
market capitalization.
Some commentators called the launch Europes worst performing IPO of 2014.
EDreams moved quickly, asking their shareholders for authorization to Discharge to Mr. James Otis
Hare for the exercise of his mandate as director of the Company until his resignation as of 25 March,
2015.
EDreams issued the following announcement: Effective March 25, 2015, eDreams ODIGEO (the
Company) accepts the resignation of Mr. James Hare as an Independent member from the Board of
Directors.
In June 2015, CEO Dana Dunne introduced a new strategy focusing on mobile, revenue
diversification and customer experience improvements, which led to a strong turnaround in business
performance.
Dunne's new strategy caused that stock price to rise above 3 euros by January 2017.
But it had been a tough lesson for the company, and a warning of the dangers inherent in any IPO.

Procedure
IPO procedures are governed by different laws in different countries. In the United States, IPOs are
regulated by the United States Securities and Exchange Commission under the Securities Act of
1933. In the United Kingdom, the UK Listing Authority reviews and approves prospectuses and
operates the listing regime.

Advance planning
Planning is crucial to a successful IPO. One book suggests the following 7 advance planning steps:

1. develop an impressive management and professional team

2. grow the company's business with an eye to the public marketplace
3. obtain audited financial statements using IPO-accepted accounting principles
4. clean up the company's act
5. establish antitakeover defences
6. develop good corporate governance
7. create insider bail-out opportunities and take advantage of IPO windows.
Retention of underwriters
IPOs generally involve one or more investment banks known as "underwriters". The company
offering its shares, called the "issuer", enters into a contract with a lead underwriter to sell its shares
to the public. The underwriter then approaches investors with offers to sell those shares.
A large IPO is usually underwritten by a "syndicate" of investment banks, the largest of which take
the position of "lead underwriter". Upon selling the shares, the underwriters retain a portion of the
proceeds as their fee. This fee is called an underwriting spread. The spread is calculated as a
discount from the price of the shares sold (called the gross spread). Components of an underwriting
spread in an initial public offering (IPO) typically include the following (on a per share basis):
Manager's fee, Underwriting feeearned by members of the syndicate, and the Concession
earned by the broker-dealer selling the shares. The Manager would be entitled to the entire
underwriting spread. A member of the syndicate is entitled to the underwriting fee and the
concession. A broker dealer who is not a member of the syndicate but sells shares would receive
only the concession, while the member of the syndicate who provided the shares to that broker
dealer would retain the underwriting fee.[22] Usually, the managing/lead underwriter, also known as
the book runner, typically the underwriter selling the largest proportions of the IPO, takes the highest
portion of the gross spread, up to 8% in some cases.
Multinational IPOs may have many syndicates to deal with differing legal requirements in both the
issuer's domestic market and other regions. For example, an issuer based in the E.U. may be
represented by the main selling syndicate in its domestic market, Europe, in addition to separate
syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main
selling group is also the lead bank in the other selling groups.
Because of the wide array of legal requirements and because it is an expensive process, IPOs also
typically involve one or more law firms with major practices in securities law, such as the Magic
Circle firms of London and the white shoe firms of New York City.
Financial historians Richard Sylla and Robert E. Wright have shown that before 1860 most early
U.S. corporations sold shares in themselves directly to the public without the aid of intermediaries
like investment banks.The direct public offering or DPO, as they term it,] was not done by auction but
rather at a share price set by the issuing corporation. In this sense, it is the same as the fixed price
public offers that were the traditional IPO method in most non-US countries in the early 1990s. The
DPO eliminated the agency problem associated with offerings intermediated by investment banks.
There has recently been a movement based on crowd funding to revive the popularity of Direct
Public Offerings.

Allocation and pricing

The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods
include:

Best efforts contract

Firm commitment contract
All-or-none contract
Bought deal
Public offerings are sold to both institutional investors and retail clients of the underwriters. A
licensed security salesperson (Registered Representative in the USA and Canada) selling shares of
a public offering to his clients is paid a portion of the selling concession (the fee paid by the issuer to
the underwriter) rather than by his client. In some situations, when the IPO is not a "hot" issue
(undersubscribed), and where the salesperson is the client's advisor, it is possible that the financial
incentives of the advisor and client may not be aligned.
The issuer usually allows the underwriters an option to increase the size of the offering by up to 15%
under certain circumstance known as the greenshoe or overallotment option. This option is always
exercised when the offering is considered a "hot" issue, by virtue of being oversubscribed.
In the USA, clients are given a preliminary prospectus, known as a red herring prospectus, during
the initial quiet period. The red herring prospectus is so named because of a bold red warning
statement printed on its front cover. The warning states that the offering information is incomplete,
and may be changed. The actual wording can vary, although most roughly follow the format
exhibited on the Facebook IPO red herring. During the quiet period, the shares cannot be offered for
sale. Brokers can, however, take indications of interest from their clients. At the time of the stock
launch, after the Registration Statement has become effective, indications of interest can be
converted to buy orders, at the discretion of the buyer. Sales can only be made through a final
prospectus cleared by the Securities and Exchange Commission.
The Final step in preparing and filing the final IPO prospectus is for the issuer to retain one of the
major financial "printers", who print (and today, also electronically file with the SEC) the registration
statement on Form S-1. Typically, preparation of the final prospectus is actually performed at the
printer, where in one of their multiple conference rooms the issuer, issuer's counsel (attorneys),
underwriter's counsel (attorneys), the lead underwriter(s), and the issuer's accountants/auditors
make final edits and proofreading, concluding with the filing of the final prospectus by the financial
printer with the Securities and Exchange Commission.
Before legal actions initiated by New York Attorney General Eliot Spitzer, which later became known
as the Global Settlement enforcement agreement, some large investment firms had initiated
favorable research coverage of companies in an effort to aid corporate finance departments and
retail divisions engaged in the marketing of new issues. The central issue in that enforcement
agreement had been judged in court previously. It involved the conflict of interest between
the investment banking and analysis departments of ten of the largest investment firms in the United
States. The investment firms involved in the settlement had all engaged in actions and practices that
had allowed the inappropriate influence of their research analysts by their investment bankers
seeking lucrative fees. A typical violation addressed by the settlement was the case
of CSFB and Salomon Smith Barney, which were alleged to have engaged in inappropriate spinning
of "hot" IPOs and issued fraudulent research reports in violation of various sections within
the Securities Exchange Act of 1934.

Pricing
A company planning an IPO typically appoints a lead manager, known as a book runner, to help it
arrive at an appropriate price at which the shares should be issued. There are two primary ways in
which the price of an IPO can be determined. Either the company, with the help of its lead
managers, fixes a price ("fixed price method"), or the price can be determined through analysis of
confidential investor demand data compiled by the book runner ("book building").
Historically, many IPOs have been underpriced. The effect of underpricing an IPO is to generate
additional interest in the stock when it first becomes publicly traded. Flipping, or quickly selling
shares for a profit, can lead to significant gains for investors who were allocated shares of the IPO at
the offering price. However, underpricing an IPO results in lost potential capital for the issuer. One
extreme example is theglobe.com IPO which helped fuel the IPO "mania" of the late 1990s internet
era. Underwritten by Bear Stearns on 13 November 1998, the IPO was priced at $9 per share. The
share price quickly increased 1000% on the opening day of trading, to a high of $97. Selling
pressure from institutional flipping eventually drove the stock back down, and it closed the day at
$63. Although the company did raise about $30 million from the offering, it is estimated that with the
level of demand for the offering and the volume of trading that took place they might have left
upwards of $200 million on the table.
The danger of overpricing is also an important consideration. If a stock is offered to the public at a
higher price than the market will pay, the underwriters may have trouble meeting their commitments
to sell shares. Even if they sell all of the issued shares, the stock may fall in value on the first day of
trading. If so, the stock may lose its marketability and hence even more of its value. This could result
in losses for investors, many of whom being the most favored clients of the underwriters. Perhaps
the best known example of this is the Facebook IPO in 2012.
Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to
reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise
an adequate amount of capital for the company. When pricing an IPO, underwriters use a variety of
key performance indicators and non-GAAP measures. The process of determining an optimal price
usually involves the underwriters ("syndicate") arranging share purchase commitments from leading
institutional investors.
Some researchers (Friesen & Swift, 2009) believe that the underpricing of IPOs is less a deliberate
act on the part of issuers and/or underwriters, and more the result of an over-reaction on the part of
investors (Friesen & Swift, 2009). One potential method for determining underpricing is through the
use of IPO underpricing algorithms.
Advantages and disadvantages
Advantages
When a company lists its securities on a public exchange, the money paid by the investing public for
then newly issued shares goes directly to the company (primary offering) as well as to any early
private investors who opt to sell all or a portion of their holdings (secondary offering) as part of the
larger IPO. An IPO, therefore, allows a company to tap into a wide pool of potential investors to
provide itself with capital for future growth, repayment of debt, or working capital. A company selling
common shares is never required to repay the capital to its public investors. Those investors must
endure the unpredictable nature of the open market to price and trade their shares. After the IPO,
when shares trade freely in the open market, money passes between public investors. For early
private investors who choose to sell shares as part of the IPO process, the IPO represents an
opportunity to monetize their investment. After the IPO, once shares trade in the open market,
investors holding large blocks of shares can either sell those shares piecemeal in the open market,
or sell a large block of shares directly to the public, at a fixed price, through a secondary market
offering. This type of offering is not dilutive, since no new shares are being created.
Once a company is listed, it is able to issue additional common shares in a number of different ways,
one of which is the follow-on offering. This method provides capital for various corporate purposes
through the issuance of equity (see stock dilution) without incurring any debt. This ability to quickly
raise potentially large amounts of capital from the marketplace is a key reason many companies
seek to go public.
An IPO accords several benefits to the previously private company:

Enlarging and diversifying equity base

Enabling cheaper access to capital
Increasing exposure, prestige, and public image
Attracting and retaining better management and employees through liquid equity participation
Facilitating acquisitions (potentially in return for shares of stock)
Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.
Disadvantages
There are several disadvantages to completing an initial public offering:

Significant legal, accounting and marketing costs, many of which are ongoing
Requirement to disclose financial and business information
Meaningful time, effort and attention required of management
Risk that required funding will not be raised
Public dissemination of information which may be useful to competitors, suppliers and
customers.
Loss of control and stronger agency problems due to new shareholders
Increased risk of litigation, including private securities class actions and shareholder derivative
actions
The launch by dreams (Europe's largest independent online travel agency) illustrates some of the
risks involved in an IPO.
Independent Board Member James Hare (James Otis Hare II) oversaw the company's public launch
on 4 April 2014.
eDreams offered its stock at 10.25 Euros per share.
That stock price had fallen to 1.02 Euros by 24 October 2014, wiping out around one billion Euros of
market capitalization.
Some commentators called the launch Europes worst performing IPO of 2014.
EDreams moved quickly, asking their shareholders for authorization to Discharge to Mr. James Otis
Hare for the exercise of his mandate as director of the Company until his resignation as of 25 March,
2015.
EDreams issued the following announcement: Effective March 25, 2015, eDreams ODIGEO (the
Company) accepts the resignation of Mr. James Hare as an Independent member from the Board of
Directors.
In June 2015, CEO Dana Dunne introduced a new strategy focusing on mobile, revenue
diversification and customer experience improvements, which led to a strong turnaround in business
performance.
Dunne's new strategy caused that stock price to rise above 3 euros by January 2017.
But it had been a tough lesson for the company, and a warning of the dangers inherent in any IPO.

Procedure
IPO procedures are governed by different laws in different countries. In the United States, IPOs are
regulated by the United States Securities and Exchange Commission under the Securities Act of
1933 In the United Kingdom, the UK Listing Authority reviews and approves prospectuses and
operates the listing regime.

Advance planning
Planning is crucial to a successful IPO. One book [21] suggests the following 7 advance planning
steps:

1. develop an impressive management and professional team

2. grow the company's business with an eye to the public marketplace
3. obtain audited financial statements using IPO-accepted accounting principles
4. clean up the company's act
5. establish antitakeover defences
6. develop good corporate governance
7. Create insider bail-out opportunities and take advantage of IPO windows.

Retention of underwriters
IPOs generally involve one or more investment banks known as "underwriters". The company
offering its shares, called the "issuer", enters into a contract with a lead underwriter to sell its shares
to the public. The underwriter then approaches investors with offers to sell those shares.
A large IPO is usually underwritten by a "syndicate" of investment banks, the largest of which take
the position of "lead underwriter". Upon selling the shares, the underwriters retain a portion of the
proceeds as their fee. This fee is called an underwriting spread. The spread is calculated as a
discount from the price of the shares sold (called the gross spread). Components of an underwriting
spread in an initial public offering (IPO) typically include the following (on a per share basis):
Manager's fee, Underwriting feeearned by members of the syndicate, and the Concession
earned by the broker-dealer selling the shares. The Manager would be entitled to the entire
underwriting spread. A member of the syndicate is entitled to the underwriting fee and the
concession. A broker dealer who is not a member of the syndicate but sells shares would receive
only the concession, while the member of the syndicate who provided the shares to that broker
dealer would retain the underwriting fee Usually, the managing/lead underwriter, also known as
the book runner, typically the underwriter selling the largest proportions of the IPO, takes the highest
portion of the gross spread, up to 8% in some cases.
Multinational IPOs may have many syndicates to deal with differing legal requirements in both the
issuer's domestic market and other regions. For example, an issuer based in the E.U. may be
represented by the main selling syndicate in its domestic market, Europe, in addition to separate
syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main
selling group is also the lead bank in the other selling groups.
Because of the wide array of legal requirements and because it is an expensive process, IPOs also
typically involve one or more law firms with major practices in securities law, such as the Magic
Circle firms of London and the white shoe firms of New York City.
Financial historians Richard Sylla and Robert E. Wright have shown that before 1860 most early
U.S. corporations sold shares in themselves directly to the public without the aid of intermediaries
like investment banks. The direct public offering or DPO, as they term it,] was not done by auction
but rather at a share price set by the issuing corporation. In this sense, it is the same as the fixed
price public offers that were the traditional IPO method in most non-US countries in the early 1990s.
The DPO eliminated the agency problem associated with offerings intermediated by investment
banks. There has recently been a movement based on crowd funding to revive the popularity of
Direct Public Offerings

Allocation and pricing

The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods
include:

Best efforts contract

Firm commitment contract
All-or-none contract
Bought deal
Public offerings are sold to both institutional investors and retail clients of the underwriters. A
licensed security salesperson (Registered Representative in the USA and Canada) selling shares of
a public offering to his clients is paid a portion of the selling concession (the fee paid by the issuer to
the underwriter) rather than by his client. In some situations, when the IPO is not a "hot" issue
(undersubscribed), and where the salesperson is the client's advisor, it is possible that the financial
incentives of the advisor and client may not be aligned.
The issuer usually allows the underwriters an option to increase the size of the offering by up to 15%
under certain circumstance known as the green shoe or overallotment option. This option is always
exercised when the offering is considered a "hot" issue, by virtue of being oversubscribed.
In the USA, clients are given a preliminary prospectus, known as a red herring prospectus, during
the initial quiet period. The red herring prospectus is so named because of a bold red warning
statement printed on its front cover. The warning states that the offering information is incomplete,
and may be changed. The actual wording can vary, although most roughly follow the format
exhibited on the Facebook IPO red herring.[26] During the quiet period, the shares cannot be offered
for sale. Brokers can, however, take indications of interest from their clients. At the time of the stock
launch, after the Registration Statement has become effective, indications of interest can be
converted to buy orders, at the discretion of the buyer. Sales can only be made through a final
prospectus cleared by the Securities and Exchange Commission.
The Final step in preparing and filing the final IPO prospectus is for the issuer to retain one of the
major financial "printers", who print (and today, also electronically file with the SEC) the registration
statement on Form S-1. Typically, preparation of the final prospectus is actually performed at the
printer, where in one of their multiple conference rooms the issuer, issuer's counsel (attorneys),
underwriter's counsel (attorneys), the lead underwriter(s), and the issuer's accountants/auditors
make final edits and proofreading, concluding with the filing of the final prospectus by the financial
printer with the Securities and Exchange Commission.[27]
Before legal actions initiated by New York Attorney General Eliot Spitzer, which later became known
as the Global Settlement enforcement agreement, some large investment firms had initiated
favorable research coverage of companies in an effort to aid corporate finance departments and
retail divisions engaged in the marketing of new issues. The central issue in that enforcement
agreement had been judged in court previously. It involved the conflict of interest between
the investment banking and analysis departments of ten of the largest investment firms in the United
States. The investment firms involved in the settlement had all engaged in actions and practices that
had allowed the inappropriate influence of their research analysts by their investment bankers
seeking lucrative fees.[28] A typical violation addressed by the settlement was the case
of CSFB and Salomon Smith Barney, which were alleged to have engaged in inappropriate spinning
of "hot" IPOs and issued fraudulent research reports in violation of various sections within
the Securities Exchange Act of 1934.

Pricing
A company planning an IPO typically appoints a lead manager, known as a bookrunner, to help it
arrive at an appropriate price at which the shares should be issued. There are two primary ways in
which the price of an IPO can be determined. Either the company, with the help of its lead
managers, fixes a price ("fixed price method"), or the price can be determined through analysis of
confidential investor demand data compiled by the bookrunner ("book building").
Historically, many IPOs have been underpriced. The effect of underpricing an IPO is to generate
additional interest in the stock when it first becomes publicly traded. Flipping, or quickly selling
shares for a profit, can lead to significant gains for investors who were allocated shares of the IPO at
the offering price. However, underpricing an IPO results in lost potential capital for the issuer. One
extreme example is theglobe.com IPO which helped fuel the IPO "mania" of the late 1990s internet
era. Underwritten by Bear Stearns on 13 November 1998, the IPO was priced at $9 per share. The
share price quickly increased 1000% on the opening day of trading, to a high of $97. Selling
pressure from institutional flipping eventually drove the stock back down, and it closed the day at
$63. Although the company did raise about $30 million from the offering, it is estimated that with the
level of demand for the offering and the volume of trading that took place they might have left
upwards of $200 million on the table.
The danger of overpricing is also an important consideration. If a stock is offered to the public at a
higher price than the market will pay, the underwriters may have trouble meeting their commitments
to sell shares. Even if they sell all of the issued shares, the stock may fall in value on the first day of
trading. If so, the stock may lose its marketability and hence even more of its value. This could result
in losses for investors, many of whom being the most favored clients of the underwriters. Perhaps
the best known example of this is the Facebook IPO in 2012.
Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to
reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise
an adequate amount of capital for the company. When pricing an IPO, underwriters use a variety of
key performance indicators and non-GAAP measures.[29] The process of determining an optimal price
usually involves the underwriters ("syndicate") arranging share purchase commitments from leading
institutional investors.
Some researchers (Friesen & Swift, 2009) believe that the underpricing of IPOs is less a deliberate
act on the part of issuers and/or underwriters, and more the result of an over-reaction on the part of
investors (Friesen & Swift, 2009). One potential method for determining underpricing is through the
use of IPO underpricing algorithms.

History of stock broking

The functioning of stock broking in India was started in 1875. The BSE is oldest stock
broking of India. History of Indian stocks trading starts with the 318 person taking
membership in Stock Brokers Association and Native Share, which is known by name as
Bombay Stock Exchange (BSE).

The functioning of stock broking in India was started in 1875. The BSE oldest stock broking of India.
History of Indian stocks trading starts with the 318 person taking membership in Stock Brokers
Association and Native Share, which is known by name as Bombay Stock Exchange (BSE). In the year
1965, BSE got a permanent acknowledgment from Government of India which was most required. The
National Stock Exchange arrives 2nd to the BSE in the terms of status. NSE and BSE represent
themselves as the synonyms of the Indian stock market. History of stock market in India is almost
same as history of BSE.
An up-beat mood of marketplace was lost abruptly with the Harshad Mehta scam. This came to the
public knowledge that Harshad Mehta, who is also called as big-bull and giant of Indian stock market
which diverted huge fund from banks by fraudulent means. He also played with millions of shares of
many companies. For preventing such frauds, Government formed SEBI, through Act in 1992. The
SEBI is statutory body which regulates and controls functioning of brokers, stock exchanges, portfolio
manager investment advisors, sub-brokers, etc. SEBI obliged several tough measures to protect
interest of investor. Now with inception of the online trade and every day settlements chances for
fraud are nil, top official of SEBI says.

Sensex crossed 5000 mark in year 1999 and 6000 mark in year 2000. Foreign institutional investor
(FII) is investing in stock markets in India on very large scale. Liberal economic policies pursue by
successive Government attracted many foreign institutional investors towards large scale. The
impulsive behavior and action of market dedicated it tag - 'volatile market.' The factors which affected
market in past were the good monsoon, rise to power of Bharatiya Janatha Party's etc. The result of
cricket matches between Pakistan and India also affected movements of stock broking in India.
National Democratic Alliance which was led by BJP, in 2004 the public election unsuccessfully tried for
riding on market sentiment to power. NDA is voted out of the power and sensex recorded biggest fall
in day amidst fears which Congress-Communist coalitions would have stall economic reform.

India, after US hosts the large number of the listed companies. The Global investors now seek India as
preferred location for the investment. Stock market now also appeals to the middle class Indians. Most
of the Indian working in foreign country now diverts their savings to the stocks. This new phenomenon
is result of diminished interest rate from banks and opening of the online trading. Stock brokers based
in the India are opening office in different country mainly to cater needs of the Non Resident Indians.
They can sell or buy stocks online while returning from work places. The recent incidents which led to
the growing interests among all Indian middle class is initial public offer announced by ONGC, Maruti
Udyog Limited, Tata Consultancy Services and many big names like such. A bullish run of stock
market can associated with steady growth of 6% in GDP, growth of Indian company to MNCs, the
large potential of the growth in fields of mass media, telecommunication, education, IT sectors and
tourism backed by the economic reforms ensures that the Indian stock market continue its bull run.